MPHJ Technology Investments quickly became one of the best-known "patent trolls" of all time by sending out thousands of letters to small businesses—16,465 of them, we now know—saying that if the business did not pay a licensing fee of $1,000 or more per worker, it would be sued for patent infringement. MPHJ claimed to have patents that cover any networked "scan-to-email" function.

As the debate over so-called "patent trolls" has flared up in Congress, MPHJ became the go-to example for politicians and attorneys general trying to show that patent abuse has spun out of control. "We're talking about bottom feeders," said Sen. Claire McCaskill (D-MO) in one Senate hearing focused on patent demand letters.

We now know that MPHJ has also become the first patent troll targeted by the Federal Trade Commission. The FTC's interest in MPHJ was revealed in an audacious "preemptive strike" lawsuit that MPHJ actually filed against the FTC on Monday. The suit, which names the four sitting FTC commissioners personally, says that the agency has overstepped its bounds and trampled on MPHJ's constitutional rights.

The new lawsuit (PDF) also reveals how MPHJ organized its 101 subsidiary LLCs, which all have bizarre six-letter names like GosNel and IntPar. It discloses how many targets MPHJ found and how they were chosen. And the final exhibit—the FTC's draft complaint, which was on the verge of being filed—reveals the mystery of who actually owns MPHJ.

The company's sole member is Jay Mac Rust, a Texas lawyer with a trail of troubled cases, including one where he was accused of running a "Ponzi scheme." Last year, Ars was provided with a recording of one of Rust's enforcement calls. "99 percent of people are using it," said Rust about the MPHJ patents at that time. "You know it and I know it."

An inquiry begins

News of the FTC federal inquiry comes as yet another state attorney general, New York's Eric Schneiderman, disclosed that he has taken legal action against the company. Schneiderman's office is set to reveal a settlement with MPHJ on Tuesday, one that would bar the company from making certain types of patent demands in New York. The settlement documents show that MPHJ bought its patents for $1 from the previous owner, Project Paperless, according to Reuters.

Further Reading

In MPHJ's telling, the FTC action is part of a government pile-on that occurred after a lawsuit was filed by the Vermont attorney general in May, which claimed that MPHJ had violated consumer protection laws.

"Having become aware of the suit brought by Vermont, and the publicity and local political favor garnered by the Vermont Attorney General as a result of its suit, a number of other state Attorney Generals in June and July served Civil Investigative Demands upon MPHJ," write MPHJ lawyers. "Counsel for MPHJ was required to spend significant time and resources during the summer of 2013 responding to these various inquiries, which extended into the fall."

The FTC first sent a subpoena to MPHJ in July 2013, "seeking certain information regarding MPHJ’s patent-related correspondence and enforcement activity." It also served a subpoena on Farney Daniels, the law firm retained by MPHJ to help with its enforcement campaign. MPHJ and its lawyers responded in August.

In December, the FTC said it was going to sue MPHJ, Rust, and Farney Daniels—unless they agreed to a consent judgment that "sought relief far beyond what the FTC could obtain by litigating in federal court and securing a judgment," according to MPHJ. The documents don't go into further detail about what the FTC was seeking.

The FTC was going to sue under Section 5 of the FTC Act, which bars deceptive trade practices. MPHJ says that the FTC is greatly overstepping its bounds. The patent-licensing behavior doesn't even amount to "commerce" by the standards of the FTC Act, because the letters are not "the offer of a good or sale for service," argues MPHJ. Furthermore, MPHJ has a First Amendment right to notify companies that it believes its patents are being infringed.

In the lawsuit, MPHJ stands by its claims that the patent's inventor, Laurence Klein, was the first to invent a "seamless" document-to-e-mail system. It notes that a fifth patent, No. 8,488,173, was issued by the Patent Office in July 2013. That patent was granted after a "review of all of the prior art" provided by scanner companies. Like the others, it has a priority date of 1997, which is when Klein is said to have first disclosed the invention to the patent office.

Those assertions are constitutionally protected, the company says.

"[T]he FTC has decided it does not like the free speech in which MPHJ is engaged and is seeking to interfere with or stop that speech," said MPHJ spokesperson Barry Pound in an email to Ars. He continued:

The FTC’s issues appear to be based principally upon its remarkable and new contention that if any U.S. patent owner threatens suit for infringement, even against a single infringer, and then fails promptly to bring suit for infringement, then the FTC may sue it for committing an unfair trade practice unless the patent owner can prove that at the time the threat was made, it intended to bring suit.

The FTC is wrong factually about MPHJ’s intentions with respect to its alleged threats to bring suit. But more importantly, the FTC is wrong in thinking that it has any authority over this matter.

Ultimately, they're confident that federal courts will find the FTC's conduct is "both unlawful and outside its jurisdiction."

Free speech or deception?

The FTC complaint (PDF) drills down on a few points in the MPHJ letters that the government says were deceptive. First of all, MPHJ implied that it was having success in licensing its patents and that there had been a "positive response."

MPHJ sent three different letters, increasingly urgent in tone. The first letter, a copy of which was published by Ars one year ago, lists the patents and states that the company being targeted is likely infringing them. Those letters almost never produced responses, according to MPHJ.

The second letter was signed by one of two Farney Daniels attorneys and was on law firm stationary—but oddly, it included no e-mail or phone number for the law firm. Instead, it had the phone number for a call center.

"In numerous instances, possibly all instances, messages left at the telephone number listed on the Second Letter were returned by Defendant Rust personally or by other individuals working for or on behalf of MPHJ, rather than by a Farney Daniels attorney or by Farney Daniels staff," wrote FTC lawyers in their complaint.

The third letter was the most threatening and included a draft complaint, which Farney Daniels said would be filed. A key issue is whether MPHJ intended to file lawsuits at all or simply threatened to do so. Even though MPHJ has now begun to file actual lawsuits, the idea that it was just "faking it" earlier on has become a point of major contention. MPHJ says that it was at first delayed from filing suit by a variety of factors, including the legal action brought by Vermont and other attorneys general.

First letters were sent, in all, to more than 16,000 small businesses. Third letters were sent to approximately 4,870 businesses in all 50 states and the District of Columbia from December 2012 to May 2013.

MPHJ targeted only businesses that it believed had between 20 and 100 employees. "MPHJ concluded that it was reasonable to begin addressing the infringements of the smaller group of companies, the 20-49 and 50-99 groups, and then successively address the increasingly larger companies," its lawsuit explains.

It used "common commercially available data" to determine which businesses fit into those categories and selected ones with certain characteristics. For instance, it sought to license insurance companies while excluding restaurants and businesses it wasn't sure would have a networked office. There were some major and well-publicized misfires, however; in Vermont, MPHJ sent a letter to a nonprofit that worked with developmentally disabled adults. In Nebraska, it sent a letter to an Alzheimer's patient in a nursing home.

Overall, the campaign wasn't that successful, selling a total of 17 licenses. By trying to mass-license Main Street, however, the anger aroused by MPHJ has already changed the politics of the patent debate.

The FTC is currently accepting public comment about how to conduct a major study of patent assertion entities, which will include sending subpoenas to collect financial and other information from the largest ones. At the recent CES conference in Las Vegas, FTC Commissioner Julie Brill spoke briefly about that study, saying that the Commission didn't need to wait for its conclusion to take action over the issue.

If the agency does sue MPHJ, it will be the first time the FTC has taken direct legal action against a patent assertion entity.